Globalizing the Indian Rupee in 2023

Introduction

Globalizing the Indian Rupee refers to the process of increasing the international acceptance and use of the Indian currency, the Indian Rupee (INR), beyond the borders of India. Currently, geopolitical concerns in Eastern Europe and the Covid-19-caused recession have made it impossible for international trade and the economy to function. With acute foreign cash shortages and volatility, several developing nations in Asia, Africa, and Latin America are on the edge of a currency crisis.

What is Understood by the Worldwide Expansion of the Rupee?

1. Globalising the Indian Rupee

• It describes the process of rising Indian currency cross-border exchanges, particularly in import-export commerce, other current account transactions, and capital account operations.
• This would make it possible to settle global trade in Indian rupees rather than other currencies like the US dollar.

2. International Currency

• Whether the transaction in question involves the acquisition of goods, services, or financial assets, an international currency is one that is used in place of the native currencies of the parties directly involved in an international transaction.
• The USD makes up around 88% of the total volume of the world’s foreign currency markets as of July 2022, followed by the Euro, Japanese Yen, and British Pound Sterling. Only 1.7% of the total is in Indian rupees.

3. Driving Factor

• The catalyst was the expulsion of the seven Russian banks from the SWIFT system as a result of the financial sanctions against Russia brought on by Ukraine.
• The relevance of this payment agreement increased in 2022–2023 as India’s reliance on subsidized Russian oil rose, making it the country’s second-largest supply of crude oil.

4. India’s Efforts

• The RBI published a circular in July 2022 titled “International Trade Settlement in Indian Rupees” that highlighted the rules for both trade settlement and cross-border transactions in Rupees.
• The RBI most recently established the framework for rupee settlements for trade with up to 18 nations in March 2023.
• These banks are now able to initiate Special Vostro Rupee Accounts (SVRAs) in order to settle transactions in Indian Rupees.
• India and Malaysia decided to settle their trade on Indian rupees in April 2023.
• A new payment settlement mechanism that the RBI unveiled in July 2022 will help the government promote the usage of the Indian rupee in cross-border trade as part of its Foreign Trade Policy 2023.

Also Read: What is China Taiwan Conflict in 2023

5. Significance

• Reducing reliance on the USD for international trade is the main benefit of internationalizing the rupee. It would boost India’s negotiating position in world trade much more.
• By removing their encountering currency volatility, using the rupee more widely in overseas trade can help Indian businesses lower their currency risk. This can lower operating expenses, which will help exports be more competitive on the world market.
• Additionally, if a considerable portion of India’s trade can be settled on the basis of the indigenous currency, the need to keep foreign exchange reserves could be significantly reduced.

What are the Major Difficulty to Globalising of Rupee?

1. Exchange Rate Stability: Maintaining stability in currency rates is one of the biggest challenges. The value of the Rupee will fluctuate on the international currency markets as it is used more frequently outside. Establishing the Rupee as a secure global currency might be difficult because this can lead to risk and uncertainty for businesses and investors.
2. Economic and Financial Stability: A powerful and secure domestic economy is necessary for currency globalization. The credibility of the Rupee in the international arena can be impacted by problems like inflation, fiscal imbalances, and monetary policy management. Keeping financial and economic stability is essential to fostering confidence in the Rupee as a reserve currency.
3. Capital Controls and Regulations: To govern their own economies, several nations enact laws and capital controls. These limitations may hamper the free movement of money and hinder the free exchange of the Rupee and its usage in international trade. It can be difficult to remove these obstacles and harmonize laws in various countries.
4. International Acceptance and Infrastructure: Establishing the appropriate infrastructure and mechanisms is necessary for a currency to gain acceptability on a global scale. To facilitate the usage of the Rupee, this includes creating a strong banking system, payment networks, and international financial institutions. The absence of infrastructure and universal acceptability may be a major obstacle to the currency’s globalization.
5. Trust and Confidence: It is crucial to foster trust and confidence in the rupee as a reliable and stable currency. It necessitates showcasing effective monetary policies, open government, and a history of trustworthy financial management. Gaining the confidence of foreign investors, companies, and people is essential for the Rupee’s acceptance on a worldwide scale.
6. Political and Geopolitical Factors: The degree to which a currency is accepted throughout the world can depend on political stability and geopolitical factors. The progress of the Rupee’s globalization may be hampered by conflicts, sanctions, or changes in governmental policies. The creation of a supportive geopolitical and political climate is required for seamless integration into the international financial system.
7. Competing Currencies: Other significant international currencies like the US Dollar, Euro, and Japanese Yen would compete with the Rupee. The dominance of these currencies in global trade and finance is well recognized. For the Rupee’s globalization, overcoming the network effects and market preferences for these currencies can be extremely difficult.

What steps can be taken to Facilitate Rupee Globalization?

1. Better Planning

• To ensure that rupee internationalization functions in a way that does not negatively impact the economy’s fundamentals, India would need to think carefully and prepare ahead.
• To ensure the sustainability of the economy, the government must carefully weigh the advantages against the potential hazards and take the necessary action.
• To better withstand external fluctuations and make it simpler for the RBI to administer its monetary policy, India also needs a sizable and sophisticated domestic financial market.

2. Focussing on Enhancing Exports

• India has made a minimal effort to promote rupee trading, but it would take some time for the concept to catch on. The acceptance of the rupee may initially be restricted to nations that have a deficit with India.
• India will require to include additional trading partners who can make purchases with Indian rupees.
• India’s top export markets are the US and the EU, while the other countries would be those that export oil. It sounds feasible to bring the latter into our group.

3. Other Concerted Steps that Government can Take

• The elimination of limitations on domestic currency trading in the spot and future markets.
• Allowing domestic companies to issue invoices for imports and exports in their own currency.
• The ability for foreign businesses, financial institutions, governmental organizations, and people to possess the national currency and financial instruments.

Is the US Dollar still the dominant currency in the world?

• According to data from the International Monetary Fund (IMF) on holdings of foreign exchange reserves, the USD’s share has not significantly changed since the Ukraine crisis and is still close to 60%, with the euro coming in second at 20%.
• Next are the yen and the British pound. Compared to the Australian dollar and Swiss franc, the Renminbi has a smaller stake.
• The US dollar is popular because it is widely accepted as a unit of account for international trade and because there is a high demand for assets denominated in the US currency globally.
• Many nations throughout the world purchase US government debt as a hedge against currency changes that could damage the value of reserves.
• The US dollar’s dominance as a global reserve currency is therefore far from over.

Conclusion

While the potential benefits of the Indian Rupee’s globalization, such as improved trade, greater international recognition, and decreased currency risks, must be properly managed, so must the drawbacks. India must evaluate its economic preparedness, enhance its financial system, and strike a balance between retaining monetary policy independence and international connectivity. Any choice regarding the globalization of the Indian Rupee should only be made through thorough research, stakeholder involvement, and a thorough knowledge of the potential long-term effects on India’s economy and sovereignty.

Frequently Asked Questions (FAQs)

Sources:

• Where Will The Rupee Go In 2023? – Forbes India
• Internationalisation of rupee: Why and what are the benefits? | Explained News – The Indian Express
• Rupee Globalization to Spur Easier Trade, Ex-RBI Official Says – Bloomberg
• Where is the rupee headed in 2023? – The Hindu BusinessLine